M&A: The Life-Saving Strategy

M&A: The Life-Saving Strategy

COVID-19 crises still have most of the companies dwelling on the effects it has suffered or has left to be through because of the pandemic. But as they put their sights towards the future, there may be opportunities to make one or more long-sought acquisitions. business brokers

It might turn out to be beneficial if businesses are thinking of examining their existing lists of prominent acquisition targets and should gear themselves to act, as deal premiums are likely to come down and availability of the assets that companies are reluctant to sell will increase. sell business

But if history has a say, it will be difficult to maximize the window. buy business

Takeaways from the Global Financial Crisis sell business india

Proofs from the global financial crisis (GFC) from late 2007 through early 2009 shows that companies that made significant acquisitions during an economic downturn have been at their best performance rather than those that did not. buy business india

There are some provisions: The GFC was, as the name suggests, a financial crisis, and was somewhat impacted only the financial services and real estate sectors. Governments had to work as saviours for banks as many companies were overextended. Consumers were crunched as the value of their homes dropped drastically and some found their mortgages drowning. buy business india

Today, we have almost the entire services sector of the economy paralyzed and unemployment is reaching new picks. The Covid-19 crisis is first and foremost a health crisis, and the progress of the pandemic might be the prime factor in gauging the length of the downturn and, thus, the ideal M&A window. However, the GFC is the best modern example which will help to test the ultimate shape of the final recovery from an M&A perspective. sell my company

With respect to creating a deal, the recovery beginning in 2009 was very much U-shaped. That is, it took more than five years for deal volume to recover to its mean pre-crisis levels and deal value never quite recovered.

The story regarding deal multiples — defined as enterprise value divided by EBITDA (or, earnings before interest, taxes, depreciation, and amortization) — somewhat varied, with much more of a V-shaped recovery. Deal values plunged from a mean of 10.8 times in the three years before the 2008 crisis hit to as low as 6.5 times in 2009, before re-bouncing to the 10-year mean of 11.6x by 2019. buy a company

Thus, according to what history indicates, there will be a relatively short M&A window that opens as the Covid-19 crisis ends, during which bargains will be in hands of those with the liquidity and the risk tolerance to move quickly, and who have done their homework in advance. Companies for sale

Indicators pointing towards active acquires possible outperformance. buy business in india

There are some parameters to consider while examining the data. sell business in india

First, there is no accurate control in the M&A world to know whether — a company either does a deal, or it does not. Moreover, company performance as determined by total shareholder return (TSR) is the result of the amalgamation of inorganic and organic activities, as well as any number of external factors, which cannot be totally isolated. businesses to buy in india

That said, we can, therefore, conclude the following: buy a business in mumbai

  • Those companies that made acquisitions totaling at least 10% of their market cap from 2008 through 2010 (active acquirers) had an average TSR of 6.4% from January 2007 through January 2008, against that with TSR of -3.4% for less active companies. A similar variation was seen in median TSR. buy a business in delhi

  • The same pattern was seen over the period of January 2007 through January 2010, when average TSR was 10.5% for active acquirers, vs. 3.3% for less active companies.

buy a business in Bangalore. buy a business in pune

TSR for active acquirers with firm liquidity positions was boosted by an average of 5.0%. In disparity to which, other companies were only able to achieve an average increase of 1.7% from January 2007 through January 2010. This difference continues in the long run (five years) with active acquirers’ TSR growing at an average of 16.9% vs. 4.9% for other companies. sell my business in mumbai

The active deal may result in being the best option for more liquidity. sell my business in delhi

Companies with an abundance of liquidity may find that shareholders and boards are more tight-handed about how this liquidity is used. Especially, share buybacks, and possibly dividend payments, maybe cut down for some years and companies will need to keep a better level of cash in hand. These factors will bound them to use any excess cash to generate long-term shareholder value. sell my business in pune

At the same time, with a focus on preserving the health of the economy and jobs, governments and regulators are likely to be much more tolerant of larger acquisitions in many industries. businesses to buy in mumbai

EY analysis suggests it is the right time to consider M&A opportunities and to act on the same. CEOs, CFOs, heads of strategy and corporate development should direct themselves to think strategically now about the “new normal” and which acquisitions would be fit best to their ongoing business models. Companies looking forward to M&A will need to consider some of the unique factors for getting a deal done, which includes:

  • Transaction Diligence:  Diligence requiring on-field visits, such as to physical plants, is likely impossible to do digitally. Boards may also be hesitant to approve an asset or operations-heavy transactions without an actual site visit. Pressure-testing the strength of the financial statements and forecasting possible cash flows for the next year or two will be more difficult than ever. Additionally, cyber diligence will become a focus area due to the accelerating dependence on technology. businesses to buy in Delhi

  • Synergy Modeling: Synergy modelling will require conduction with an eye towards the “new normal.” For example, resilient supply chains have more redundancies than efficient supply chains, which they are more costly and have lesser opportunities to cut costs and achieve synergies. businesses to buy in pune

  • Business Models: Business models are likely to differ in our “new normal,” and it is not just what is obvious.  businesses for sale in mumbai

  • Post-Acquisition Integration: Maintaining employee morale and engagement is more critical, considering the current scenario, as many will be concerned about their own job security, so demanding to put their energy towards onboarding target employees may be critical. While you can work through much of the integration playbook remotely, the culture, and change management aspects can be confusing to accurately get over a videoconference call. Being considerate of working hours; ensuring various integration meetings stick to a reasonable timeframe, and infusing the process with the appropriate amount of “ice-breaker” activities are few ways to ease the burden of the work-from-home context. business brokers

Therefore, M&A requires significant thoroughness about understanding post-COVID-19 recovery curve scenarios that target companies are likely to experience coming out of the crisis, along with understanding the true liquidity situation of the target, their near-term CAPEX or similar needs.